What is basic concept of Marshalling of securities as per S 81 of Transfer of property Act?

 Marshalling of securities is a crucial legal doctrine under the Indian Transfer of Property Act, 1882, specifically governed by Section 81. This equitable principle ensures fair treatment among creditors when multiple properties are used as security for different loans.

Definition and Legal Provision

Marshalling means arranging or systematizing securities in a proper order. Under Section 81 of the Transfer of Property Act, if the owner of two or more properties mortgages them to one person and then mortgages one or more of these properties to another person, the subsequent mortgagee has specific rights regarding debt recovery.

The provision states that the subsequent mortgagee is entitled to have the prior mortgage debt satisfied from properties not mortgaged to him, provided this doesn't prejudice the rights of the prior mortgagee or any other person who has acquired an interest in the properties.

How Marshalling Works

Practical Example:

Consider this scenario:

• X mortgages properties A, B, and C to Y (first mortgagee) for securing a loan of ₹30,000

• Later, X mortgages only property B to Z (subsequent mortgagee) for securing another loan of ₹10,000

In this case, Z (subsequent mortgagee) has the right to demand that Y's loan of ₹30,000 should be satisfied first from the sale proceeds of properties A and C only, not from property B which is also mortgaged to Z. This arrangement protects Z's interests in property B.

Essential Conditions for Marshalling

The right of marshalling securities is not absolute and must satisfy specific conditions:

• Common debtor: The mortgagees may be two or more than two-person and the mortgagor must be same.

• Multiple properties: The mortgagor must have mortgaged two or more properties to the prior mortgagee

• No contrary contract: There should be no agreement preventing marshalling

• No prejudice to prior rights: The arrangement must not harm the prior mortgagee's rights or third-party interests

• Consideration-based interests: Rights of persons who acquired interests for consideration must be protected

Purpose and Principle

The doctrine of marshalling rests on the principle of equity and natural justice. It ensures that a creditor with access to multiple securities cannot prejudice another creditor whose security comprises only one of those properties. The general principle is that when a senior creditor has multiple sources of recovery while a junior creditor has limited options, the senior creditor should first exhaust the securities not available to the junior creditor.

This equitable remedy prevents arbitrary actions by senior creditors and ensures both creditors can recover their debts as far as possible. Marshalling protects creditors with fewer security options while maintaining the legal balance in secured transactions involving multiple properties.

The doctrine ultimately serves to arrange or "marshal" the securities in favor of the subsequent mortgagee, providing them with better prospects of debt recovery while respecting the established hierarchy of mortgage rights.

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